Protectionist Crackdown - Seen vs. Unseen

In response to Living Wages & The Protectionist Train Crackdown I received the following question from YTL:

So my question: how long do we allow ourselves to trade with a country that manipulates its currency and also has hundreds of millions of near-slave labor to tap, in order to misallocate resources towards its country?

YTL Thanks for the question.

Let me start by asking a couple of questions of my own: How long does China support our reckless spending habits? At what rate of interest?

It is far too easy (and simplistic) to point the finger at a scapegoat (China) and blame them for what really ails us. What really ails the U.S. is blowing trillions of dollars in a hellhole in Iraq, a horrid medical system (more on this coming up soon), a multitude of unfunded liabilities, and an increasing inability to compete in a global economy.

Look at the irony. We asked Russia to "tear down this wall" and for China to embrace capitalism. Both happened. Now instead of competing against central planners we have to compete against real economies. We got what we asked for did we not?

It seems we do not like it and that is one side of the coin. The other side of the coin is that China is doing us a favor by providing merchandise for cheap thereby raising the standard of living of those here and in China in its wake.

Yes we have lost manufacturing jobs to China. But in a global economy were we ever going to keep them? At what price? Bear in mind that China is now losing manufacturing jobs to Vietnam. Productivity is also increasing. A few years back my hometown of Danville, Illinois was excited to get a new aluminum stamping plant. Danville's population had shrunk from 44,000 when I was growing up to something like 32,000 now. This plant was going to be a savior. The reality was the plant provided something like 10 jobs! That is how automated things are now.

It is silly to think that putting tariffs on China will bring back jobs. How many jobs would we save even if it did? 10,000 jobs? 20,000 perhaps. In return for those 10-20K jobs, the price of underwear, TVs and cars go up for EVERYONE goes up by 25%? Is this a good deal? For who other than those whose job was saved?

People complain about China manipulating its currency. What about our currency manipulation through policies at the Fed, Congressional spending, and the administration? We are blatantly pursuing a weak dollar policy. We have a Fed manipulating interest rates. If central planners at the Fed can set arbitrary interest rates, why can't central planners in China peg to currencies?

On the jobs picture also consider the seen and the unseen. Cheap goods from China are for now providing scores of trucking jobs in return for those lost manufacturing jobs. It is also providing more dock work jobs and more jobs at Walmart, Lowes, Home Depot, and countless other stores.

There is far more damage done by the Fed setting interest rates like communist central planners and this administration blowing trillions of dollars in Iraq than any peg setting by China.

There is one more way to look at it. We can no longer dictate what the world does and we should stop trying and simply clean up our own act before pointing the finger elsewhere.

But let's for the moment assume you still disagree. For the sake of argument let's put a 25% tariff on goods from China. Will that be the end of it or will goods start pouring in from Vietnam and Brazil? I suppose we could put a 25% tariff across the board on everyone. If we do we will save some 20,000 jobs and crucify millions of consumer in the process.

Would we really save any jobs by such an action? Of course not. For every underwear manufacturing job we save we would likely lose 10 restaurant jobs from people who could no longer afford (or be willing) to eat out. Once again that is the seen and the unseen.

But there is still one more seen vs. unseen consequence to the China peg. That peg for now is fueling a massive boom in Chinese equities as talked about in Stir Fried Stocks. It is also (along with policies at the Fed that ignore asset bubbles), fueling unsustainable trends in stock buybacks and leverage buyouts.

From this aspect the seen is cheap goods from China, cheap funding for a war in Iraq, and cheap credit for US consumers. It is the aftermath of the unseen that is bound to follow that everyone should be looking at. Protectionism will only heighten the complications of the unseen.

This post originally appeared in Minyanville.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/